ESTATE TAX EXEMPTION WILL FALL
Now is the Time to Plan
As values of businesses , real estate and investment portfolios continue to rise , now is the time to develop and implement an estate plan for taxpayers considering the future transfer of wealth . While legislative proposals in 2021 dropped any near-term changes in estate tax laws , the current estate tax exemption is still scheduled to be reduced by half in 2026 . To minimize future tax bills , you may benefit from transferring some of your wealth sooner rather than later .
How Did We Get Here ?
The Tax Cuts and Jobs Act of 2017 ( TCJA ) effectively doubled the federal estate tax exemption and provided for annual increases , enabling married taxpayers filing jointly to avoid taxation on the first $ 24 million of an estate in 2022 . The exemption for single taxpayers is $ 12 million .
However , those provisions are scheduled to expire on December 31 , 2025 , sending the exemption levels down to pre-TCJA levels of $ 12 million for married taxpayers and $ 6 million for single taxpayers .
With rapid growth in recent years in the value of business holdings , real estate and stock market investments , many taxpayers will find their estates over the exemption levels , exposing their estates to federal estate taxes .
It is possible that Congress could act to change the estate tax exemptions even before 2025 , and the current administration has expressed a desire to do so . But the details of such a change are unknown currently and wishing for a “ fix ” from Congress is not the best estate planning strategy .
Estate plans should be reviewed and ( if necessary ) amended every three to five years . Given the certainty that the federal exemption will change within the next four years , the window of necessity is open now .
Where to Start
• Review your estate plan to see if it ’ s still accurate and it accomplishes your goals . If your plan is more than two years old , chances are it will need to be updated . Be sure to look at the key mechanisms of your estate plan , including appointments of trustees , personal representatives , financial and healthcare powers of attorney , guardians and distribution provisions .
• Review the value of your closely held companies , land and real estate . Real estate values are astronomical and are expected to continue rising through 2022 . Given inflation and the political climate , it ’ s essential to project where you ’ re going to be when the estate tax exemptions are reduced . If the value of homes and commercial buildings were to stay where they are today , you might be fine . But they won ’ t , so you must plan .
• If you are not already using them , consider new tools and strategies for transferring assets that will protect your estate from estate taxes . Devise a plan that is active rather than passive . We recommend aggressive estate planning that includes the use of trusts such as Spousal Lifetime Access Trusts , Charitable Remainder Trusts . Grantor Retained Annuity Trusts and Irrevocable Life Insurance Trusts . This is a time to use all the tools in the toolbox that currently exist in federal law .
• If you are a partner in a business , revisit your buy-sell agreement to make sure it still aligns with your goals and includes mechanisms for setting a future price and funding a sale . If you ’ re relying on insurance to help fund obligations , revisiting coverage in light of any changes is also appropriate . If you don ’ t have a buy-sell agreement , create one now .
Change – the Only Certainty
The one thing that is certain is that the federal estate tax exemption will change in the next four years . Whether it is reduced by a new act of Congress or by the already existing TCJA is the only question . That means every taxpayer who has assets to pass on – a business , real estate , investments , art , a car collection – should be planning .
Don ’ t delay . The political winds shift quickly , and it ’ s better to be actively planning than passively sitting .
Contact your Rea advisor today to discuss your wealth transfer plan .
by : David Shallenberger , CPA Principal
230 North Market Street Wooster , Ohio 44691
( 234 ) 249-3455 david . shallenberger @ reacpa . com